Opting Out of the New Tax Rules After an Audit
Is opting out of new tax rules after an audit an option for my business? Well, beginning in 2018, your partnership, limited liability company (“LLC”), or s-corporation (“S-Corp”) could be liable if an IRS audit reveals alleged underpayment in taxes. This can be an underpayment in taxes by your partners, members, or shareholders. Unless you have elected to be a small partnership on that respective year’s tax return. To which, you may accept the tax underpayment amount as final or request a modification of the underpayment amount.
Generally, your partnership, LLC or S-Corp will then need to pay the amount in full. Which means the respective party is responsible for any failure in paying the entirety of the underpaid amount. Alternatively, you can make a valid election for an alternative payment method. This opt-out election essentially allows the partnership, LLC, or S-Corp to no longer be liable for the tax underpayment. Therefore passing its payment through to the business’ partners, members, and shareholders. In other words, you can elect to have the underpayment assessed as you originally planned to have taxed when you picking the legal structure of your partnership, LLC, or S-Corp.
In order to satisfy the requirements for the push-out election, a partnership, LLC or S-Corp must make the election in the time, form, and manner specified by the IRS. In order to qualify for the alternative payment opt-out, the partnership, S-Corp or LLC must:
(1) elect to have all the partners, members or shareholders pay the amount assessed,
(2) within 45 days from the date of the notice of the final partnership adjustment, and
(3) issue a statement of each partner’s, shareholder’s or member’s adjustment. First, issued electronically to the IRS, then by mail to each respective party,
(4) no later than 60 days after the IRS determined any adjustments to the statement.
Additionally, the partnership representative needs to sign the election with the following:
- The name, address, and taxpayer identification number of the partnership, LLC or S-Corp;
- The taxable year to which the election relates;
- A copy of the final adjustment to which the election relates;
- Identification of the underpayment in taxes (if more than one assessed tax underpayment is included in the final adjustment);
- The name, address, and correct taxpayer identification number of each person or entity who acted as a partner, member, or shareholder that respective year; and
- Any other information required or advised by the IRS in forms, instructions, or other guidance.
A separate statement is furnished for each year the IRS audit assesses an underpayment in taxes. These statements are filed electronically with the IRS and mailed to each respective party during the year the tax underpayment was found. This must be done no later than 60 days after the date any adjustments were determined by the IRS.
In addition to any forms, instructions, or other guidance required by the IRS. Then, the statement is mailed to each respective partner, member, and shareholder at their current or last known address. If a statement is returned as undeliverable, then the partnership, LLC, or S-Corp is responsible for identifying a correct address. Successfully opting out of new tax rules requires each statement to include the following:
- The name and correct taxpayer identification of whomever recieved the statement;
- The known current or last address of the respective partner, member, or shareholder;
- The partner’s, member’s or shareholder’s share of the total respective underpayment adjustments and any penalties, taxes, and other amount related to those adjustments;
- Modifications on the underpayment amount with respect to the respective partner, member, or shareholder;
- The partner’s, member’s or shareholder’s safe harbor amount;
- The date;
- The taxable year of the adjustments; and
- Any other information required by any other IRS forms, instructions, and other guidance.
What happens if you discover an error in a statement after the statements have already been filed and mailed? Well, that depends on when you find the errors and how quickly you act. Errors in a statement discovered within the 60-day time frame for mailing and filing the statements may be corrected. However, if the 60-day time frame has passed, then the IRS must give consent before correcting the error. Moreover, the IRS may also require a correction if it finds an error in a statement.
Distributing the Adjustment Among the Partners, Members, and Shareholders
The adjustments and amounts distributed among partners are partially determinants of the Internal Revenue Code, partner agreements, and underpayment amount. Below are a few examples of how this may work.
First, the specific partner, member, or shareholder recieves the adjustment. Any adjustment that not previously included in the tax return, will be allocated accordingly. Most of the time this will be in the instance that the adjustment should have been allocated under the terms of the agreement.
The safe harbor amount that the entity needs to calculate is an alternative amount that the parties could elect to individually pay. To which the alternative amount cannot be less than zero. However, this is far more detailed than has been provided here, and business owners should contact a tax professional for details.
The push-out election allows partnerships, LLCs, and S-Corps to pass the underpaid in taxes down to the respective parties. Provisions are crucial if your small partnership election is unavailable or not selected at the time of the initial tax return filling.
At Dodson Legal Group we are available to guide you through either drafting a new or amending your current agreement. Better preparing your business for potential IRS audits that may reveal an underpayment in taxes. Schedule your free consultation and speak with one of our attorneys to see how opting out of new tax rules can benefit you, today!